Good times for farm prices, but costs keep upward climb

Mon, 2011-08-08 (All day)

With record commodity prices, the impression among the mostly urban Congress is that farmers are making out like bandits nowadays. A new American Farm Bureau Federation economic report shoots holes in that scenario, citing the impact of higher input costs, particularly energy, on agriculture’s bottom line.

As the honorables in Washington pontificate and bluster about the need to get a handle on the spiraling national debt (many of them conveniently evading the fact that they were enthusiastic participants in the orgy of spending that got us in this pickle in the first place), one of the places they look to “save” money is farm programs.

Immaterial, of course, that actual farm program spending (not counting food stamps, school nutrition, and other aid programs) is spit in the ocean in terms of the overall federal budget.

With record commodity prices, the impression among the mostly urban Congress is that farmers are making out like bandits nowadays.

A new American Farm Bureau Federation economic report shoots holes in that scenario, citing the impact of higher input costs, particularly energy, on agriculture’s bottom line.

“These are encouraging times for the U.S. farm economy,” says AFBF Chief Economist Bob Young, “but higher input prices are impacting profit margins. It’s important to remember that farming is still a very capital intensive occupation and that, even in good times, high input costs affect the bottom line.”

Matt Erickson, AFBF economist who authorized the white paper, “Cost of Production: The Rising Cost of Inputs,” says high oil prices, particularly, will drive up the cost of production for corn, soybeans, wheat, rice, and cotton this year, and that higher fertilizer prices will add to the burden.

The USDA is projecting that 2011 total operating costs for farmers will be up 18 percent for corn, 13 percent for soybeans, 18 percent for wheat, 15 percent for rice, and 9 percent for cotton, compared to 2010.

“The effects of higher oil prices are reducing profits to the agricultural sector,” Erickson says. “From seed to fertilizer, each commodity is projected to have higher yearly production costs for 2011 over 2010.”

Demand for fertilizer, driven by the tight supply for grains, primarily corn, has driven up the price for nitrogen and other nutrient materials, he says. “In the current situation of tight supplies for grain, fertilizer is a necessity as production in the U.S. is at maximum. Similarly, high grain prices increase the demand for fertilizer in international markets.

High diesel prices hit farmers twice, at planting and at harvest, he notes. “With diesel a byproduct of crude oil, farm diesel prices are expected to continue to increase with projections of increased crude oil prices.”

These higher costs “will reduce the record net farm income for the agricultural sector that is projected by the USDA’s Economic Research Service,” the report says.

Looking ahead, it notes that total operating costs are expected to rise in 2012, the report notes. For cotton, the increase is projected at 3 percent over 2011; for rice, 2.2 percent; for wheat, 2.5 percent; for soybeans, 1.8 percent; and for corn, 2.2 percent.